Italy's draft budget is serious breach of EU rules: Commission

BRUSSELS (Reuters) - Italy’s 2019 budget draft is in serious breach of EU budget rules, the European Commission told Rome on Thursday, in a step that prepares the ground for what would be an unprecedented rejection of a member state’s fiscal plan.

The Commission said in a letter to Economy Minister Giovanni Tria, published on its website, that planned government spending was too high, the structural deficit - excluding one-offs and business cycle effects - would rise instead of fall, and that Italian public debt would not fall in line with EU rules.

“Those three factors would seem to point to a particularly serious non-compliance with the budgetary policy obligations laid down in the Stability and Growth Pact,” the letter said.

The Commission said that the draft budget envisaged a nominal rate of growth of net government expenditure next year of 2.7 percent, while EU rules allowed Italy only 0.1 percent.

The structural deficit would rise 0.8 percent of GDP next year, while a binding recommendation by EU finance ministers from July obliged Rome to cut it by 0.6 percent of GDP.

“Moreover, with Italy’s government debt standing at around 130 percent of GDP, our preliminary assessment also indicates that Italy’s plans would not ensure compliance with the debt criterion benchmark ... which requires a steady reduction of the debt level towards the 60 percent threshold,” the letter said.

The Commission also asked Tria to explain why he ignored a negative opinion on the budget’s macroeconomic assumptions from the Parliamentary Budget Office - Italy’s independent fiscal monitoring institution - which also violates EU law.

The Commission asked Rome to respond by Monday.

The letter is part of required consultations between the Commission and any euro zone government whose draft budget clearly breaks EU rules.

Unless the main parameters of the budget are changed, the Commission is likely to send the draft back to authorities in Rome asking for changes for the first time since it got draft-budget vetting powers in 2013.